Lesson 71 - Boom and Bust Cycles
Economies move in cycles. Periods of fast growth are often followed by slowdowns or recessions. These ups and downs are called boom and bust cycles. They matter because they affect jobs, incomes, investment returns, and government finances. Understanding why cycles happen and how they unfold helps you prepare for both good and bad times.
What is a boom?
A boom is a period when economic activity grows faster than average. Output, employment, and incomes rise. Businesses invest, consumers spend freely, and governments collect more taxes. Booms often feature optimism, rising stock prices, and easy credit. But they can also create bubbles if growth is based on speculation or excessive borrowing.
What is a bust?
A bust, or downturn, is the contraction that follows a boom. Spending slows, investments are postponed, and unemployment rises. Busts can be mild recessions or severe depressions. While painful, busts also correct excesses from the boom, bringing prices and expectations back in line with reality.
Table: Phases of the business cycle
Graph 1: Stylized business cycle
The graph shows a simplified business cycle as GDP rises and falls around a long-term growth trend.
The cycle oscillates around the trend line of long-run growth.
Graph 2: US unemployment and GDP growth
This chart compares GDP growth and unemployment in the US to show how booms lower joblessness and busts raise it.
Recessions line up with rising unemployment and negative GDP growth.
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